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Farewell and good riddance to the first home owners' boost

A friend asked me the other night whether he should wait until after the first home owners' boost expires to buy his first property. I didn't think twice. "Yes," I replied.

Usually, I’m a bit more circumspect with my financial advice, but on this point, the evidence is clear.

First home buyers are being used as unwitting instruments, doing the bidding of their baby boomer political leaders, on behalf of their parents.

Wannabe first home buyers should be sitting back and breathing a huge collective sigh of relief when the Rudd government’s boost begins to be phased out two weeks from today.

You see, it was designed with their baby boomer parents’ interests at hearts, not theirs.

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Let me explain.

The boost was conceived of about a year ago, amid all the panic about the fall out from the collapse of Lehman Brothers.

Fears were escalating that a sharp rise in joblessness would provoke a rash of forced home sales, depressing house prices. Some particularly vocal, if non-mainstream, economists were beating the drum about house prices collapsing by 40 per cent.

It was an outsider’s call, but one that, in such a climate of fear, was threatening to take hold in broader public opinion. Such precipitous falls, disastrous for the economy at the best of times, would have contributed to an even sharper downward spiral in consumer confidence than was already underway, putting the brakes even more strongly on consumer spending.

The government acted quickly.

On October 14 last year the Prime Minister and Treasurer held a joint press conference in the main committee room at Parliament House to unveil the government’s first multibillion dollar sandbag against the rising global tide of fear and loathing - its $10.4 billion Economic Security Strategy.

Along with $9 billion in bonus payments for pensioners and families came a once-off boost to the $7,000 first home buyers grant - doubling it to $14,000 for established homes and tripling it to $21,000 for new homes, ‘‘to help first home buyers purchase a home,’’ Rudd explained.

Baloney.

The irony escaped me at the time, but I had been sitting in the same room about a year earlier, when Labor in Opposition hosted a ‘‘Housing Affordability Summit’’ to deal with what it had dubbed the “housing affordability crisis”.

About 150 housing experts from all over the country were in attendance: developers, welfare groups, banks, academics. They didn’t agree on much, but they all agreed that increasing the first home buyers' grant would simply put up house prices.

As a discussion paper later released by Labor concluded: ‘‘Simply increasing the first home owners’ grant in isolation may not make housing more affordable in the long run if it leads to inflationary pressures on the cost of homes.” Labor’s own First Home Saver Accounts were designed as an explicit acknowledgement of this, dishing out government money to savers only if they could demonstrate a regular commitment to savings over a four year period.

But my how the times had changed by last October last.

In government, and facing the biggest global financial crisis since the Great Depression, falling house prices had become Labor's public enemy number one, not high house prices.

To her credit, the Australian Financial Review’s political editor, Laura Tingle, was on to it like a flash. "Just on the housing package," she inquired of Rudd during his press conference. "You said in your opening remarks that they were designed to support activity in the housing sector...is it also essentially designed to help keep housing prices from falling?’’

Bingo.

But the PM obfuscated a little: ‘‘Our principal concern here Laura is activity in the economy. Our policy action here, given the significance which private dwelling investment represents in the national accounts, is to ensure that we maintain activity in the sector. That is why these one off measures have been embraced.’’

The reality was simpler.

Boosting the grant was a very deliberate ploy to lure more first home buyers into the market, using government money to pay more than they otherwise would have for a house and helping to stave off any fall in house prices, which would have spooked existing owners (who make up about two thirds of the population).

And it worked, spectacularly.

A year on, house prices are rising again, no doubt also due to the lowest interest rates since the 1960s. The value that baby boomers and retirees have locked up in their homes is secure, at least for now.

Don’t get me wrong. I’m not against helping first home owners to afford a home. But simply giving people extra cash to pay more upfront for housing, without properly addressing underlying problems with supply, only inflates prices and makes it harder in the long term for future generations of first home buyers. Some might argue that the purpose of tripling the grant for new homes was to help encourage new supply. But I disagree. It has simply enabled developers to offload existing developments, often at a $14,000 premium.

It's clear that the political imperative to stop house prices from falling is now deeply ingrained in our political economy. First home buyers are being used as unwitting instruments, doing the bidding of their baby boomer political leaders, on behalf of their parents.

And respond they have. As the graph above shows, first home buyers turned out at record high levels in May (since the Bureau began collecting data in 1991 anyway), taking out 28.5 per cent of all new loans.

More recently, this dropped back to 25.7 per cent in July, in part due to banks belatedly tightening their lending criteria for new buyers. Gone are the days of 100 per cent loans, and hello to new requirements for buyers to show “genuine savings” of between 5 and 10 per cent, not including the grant.

So one way or another, the first home buyer frenzy is nearing an end. For buyers signing contracts from October 1, the grant will revert to $10,500 for established homes and $14,000 for new homes.

From New Years day 2010, it will be back to $7000 for both.

Not soon enough.

21 comments so far

Its a joke out there at the low end. Sh*t heaps have been snapped up that had been for sale for over a year & were basically unsaleable, before cashed up idiots started to get desperate.
Everything has risen in price by average of 50K (have seen houses go for 100K+ over estimates quite regularly - thats why everything is being auctioned now, in case anybody didn't realise.. too many idiots).
I quit looking a while back & just poke at it for entertainment now. But i'll be ready to jump when i see some value. Meanwhile my savings for the deposit get bigger. Its all good.

Commenter

cat

Location

sydney

Date and time

September 18, 2009, 9:22AM

Yes, can't wait for this friggin' sales exercise to end. The only ones who really benefited from this first home buyer hype are the real estate agents.

I am waiting for early next year before I venture into the market.

Commenter

Jim

Location

Sydney

Date and time

September 18, 2009, 11:58AM

I am so grateful to finally read something sensible regarding housing in Australia. Housing prices are so ridiculously over-inflated, that we are finding that we will stay living in the USA until we can afford to move back to Australia. The dichotomous coverage in the Age is ridiculous - on one hand complaining that no one can afford a house, and on the other heralding the 'recovery' of the housing market. Houses in Australia are at least $100K overpriced. It's time for Australians to wake up and realize that they have paid way too much for a very ordinary house.

Commenter

Sarah

Location

NY, USA

Date and time

September 18, 2009, 12:39PM

Are you trying to appeal to those who have not saved for a deposit and missed the opportunity or just one who thinks that the housing market is going to drop by +100K as soon as the incentive is removed?

Housing prices are not going to retract this year they will most likely rise as stability returns to the employment market and clearly there is no massive influx to the market of financial institution seized houses. Demand drives prices and clearly there is a demand.

I am willing to bet you are the type of financial planner who was advising people to purchase Rio Tinto stock in Oct 2007.

JI replies: Hi "Amazed". I agree with you that house prices aren't likely to fall significantly in the foreseable future (mainly due to supply issues) but I suspect at least some of the heat will come out of the lower end of the market when the boost finishes. Perhaps you were one of the lucky few buyers that had already saved a deposit and were looking to buy in about October/November last year? Such a person would have benefited from the extra boost, before the frenzy started to drive up house prices in the sub $500,000 category. I just think anyone who bought after that probably paid a price that was inflated by the extra demand coming from people who were tricked into thinking $7000 makes a real difference to affordability over a 30-year loan, in which you'll probably end up paying about the equivalent of your original loan value in interest payments. Oh, an I'm definitely not a financial planner, just an interested observer.

Commenter

Amazed at your stupidity

Location

Shanghai

Date and time

September 18, 2009, 12:53PM

It is true that property prices are over inflated and excessive, but there is no housing bubble. The general shortage of housing supply, constraints on the development of land, the time frame associated with new housing construction, and the opposition of local communities to higher density construction all mean that demand will greatly exceed supply for many years to come. Furthermore, Victoria also has the highest rate of population growth of any Australian state, and immigration levels will increase again as the economy and job markets recover. Potential home buyers that are waiting around for a price crash or for significant falls are kidding themselves

Commenter

Kanman

Date and time

September 18, 2009, 1:50PM

The grant has probably been good at stabilizing house prices in a time of turmoil in the wider economy. However we forget boomer politics at our peril and this policy clearly had a strong benefit for them. We also need to remember boomer politics in the future. What will be the effect of masses of boomers liquidising assets (house, shares). What happens when they die? Will this cause a dip in prices too? Will the government try to control it? Will the government be able to control it?

Commenter

Paul

Location

Sydney

Date and time

September 18, 2009, 2:07PM

You seem to forget, Econogirl, the reason for the perception to assist first home buyers in the first place.

Taking just one step back in the chain of cause and effect would show that the principle reason is two-fold: Keating's reintroduction of negative gearing and Howard's halving of capital gains tax. This dystopian economic pact, of putting the cart before the horse by giving preference to real estate investors and speculators rather than to first home buyers, is the fundamental reason why house prices spiralled upward within a relatively short few years, thus severely disadvantaging first home buyers.

Were it not for these two nanny state, "wealthfare" handouts gifted to those who already have a first home and who were thus able to acquire a second, third or nth house through taxpayer money, there would now be no need to worry about first home buyers and, for that matter also, correspondingly high rents.

Why must we have the highest house prices in the Western World? Even in the US, prices are about half those in Australia.

Why wasn't the Australian real estate market permitted to seek its own price levels, rather than the market being so grossly interfered with by governments?

JI replies: Good point, well made. The taxation of housing is something that the Ken Henry tax review is looking at as we speak/type. It's a shame that Australians have come to view housing as a cash cow, rather than as an essential good we must all be able to afford. I wouldn't hold your breath, though, waiting for a recommendation from Henry that negative gearing should be abolished. Wayne Swan had conniptions when it was suggested that people should be taxed on the capital gains of high end properties. Let's not forget there's an election next year...

Commenter

Quonishant

Location

Warrnambool

Date and time

September 18, 2009, 2:23PM

Thank you Jessica.
You are one of very, very few who understand and are prepared to say exactly what is going on. The Govt bleet on about helping the FHB but are really going to cause them pain.
If recent purchasers of their first homes aren't hit by unemployment in the next few years, then high interest rates due to higher inflation will surely get them.
I feel in attempting to prop up house prices so the economy looks better, the federal Government has been negligent in their housing policy. Like 'Cash for Clunkers' in the US, the Govt is encouraging higher leveraged debt when we should all be doing the opposite. High leveraged debt is one of the things that got us into this mess in the first place. The other is the Banks.....
But thats another story.

Commenter

Bearish

Location

Sydney

Date and time

September 18, 2009, 2:25PM

Well I agree with this report. But it made more sense for me to use this grant to buy my first home simply because: a) noone can predict what will happen in future accurately; b) I had to wait for at least a year to save additional $14000, and also pay rent about $18000. All in all I probably paid a bit of a premium on my property but I saved on my rent, bought home sooner, low interest rate advantage, and have already shared my property with a flatmate who pays almost 40% of my mortgage. I am ahead no matter what pundits say.

Commenter

Prajwol

Location

Sydney

Date and time

September 18, 2009, 3:18PM

Thank you for saying what our politicians, real estate agents, property market "analysts", property investors and everyone else dependent on hyperinflated house prices dare not say. Our obsession with the "great Australian dream" of home ownership is seriously getting out of control. Average house prices are at least 10x or more above average yearly incomes. Instead of addressing the real issues of increasing household debt, the boost to the first home owners' grant encourage young people to take on bigger loans - and therefore greater risks - in order to purchase the more expensive homes that they would not have considered before. These new homeowners don't realise that they'll spend the rest of their lives stressing over how they'll pay back their huge loans. Is there any wonder why Australians work some of the longest hours per week in the world? Let's not forget it was the sub-prime lending crisis in the US that triggered this recession.

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